EUR GBP - FUNDAMENTAL DRIVERS
EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic – Health – Geopolitics
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result further damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics remain a focus point as well given the ongoing war in Ukraine, but after the initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. It seems as if all three categories added longs at the worst possible time last week as the EUR failed to garner much upside momentum. With recent growth & inflation differentials turning in favour of the EUR we prefer trading the EUR higher on good news as opposed to chasing it lower on bad news right now.
4. The Week Ahead
The main event for the EUR in the week ahead will be the ECB policy decision. However, after the flurry of comments from various ECB members over the past few weeks, the meeting is not likely going to offer many surprises or fireworks, unless President Lagarde messes up her communication again. Markets are already pricing in 4 hikes (100bsp of tightening) by the end of the year, with a 25bsp hike in July and September fully priced. Thus, the focus will more likely shift to what happens after September, whether there is any specific mention that rates could rise above 0% by the end of the year. Furthermore, with inflation where it is, there has been some ECB members who have been hinting that a 50bsp might be up for discussion. This seems unlikely to be an option that the GC would want to go for at this stage but is a key risk we need to build into our scenario planning. Any comments from Lagarde that suggests a 50bsp could be possible in July would arguably be enough to give the EUR a bit of a lift. What the bank has to say about the recent move in Bund yields, and more specifically the climb in things like BTP/ Bund spreads, will be important as well. With inflation as big of a problem as it Is right now, they can’t afford to stop their hiking posture just to save spreads (even though they are important). Thus, being on the lookout for her comments on the spreads will be important, especially if the bank might be contemplating a new type of tool(s) to ease some of the issues with the widening spreads. The other driver to watch in the week ahead is the USD. As close to 60% of the DXY has a EUR weighting, any big fluctuations in the Dollar as a result of the US CPI print needs to be kept in mind for the EUR in general in the week ahead. Even though geopolitics have not really been a big EUR mover, we should keep geopolitics in the back of our min as a possible short-term catalyst for the EUR.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet . However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
2. Economic – Health – Geopolitics
With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces considerable stagflation risk, as price pressuresstay sticky while growth decelerates. Looking at growth forecasts, the pace of the expected slowdown in the UK compared to other major economies portrays a pretty bleak picture. That means current rate expectations continues to look too aggressive, even after the BoE’s recent dovish tilt. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. Political uncertainty is usually also a GBP negative, so the PM’s future remains a risk. If distrust grows the question remains whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). Reports over the weekend suggest that a no-confidence vote can happen as early as the upcoming week so that will be a focus point for GBP. The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside
3. CFTC Analysis
A fairly bullish signal for GBP as all three participant categories saw net-long weekly changes. Aggregate positioning is still below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from neutral, positioning looks stretched and means we are not too excited to chase the Pound lower from here.
4. The Week Ahead
With a very light economic data schedule for the week ahead, the more pressing matter for the GBP will probably fall to politics where reports over the weekend suggest that the PM could face a vote of no-confidence as soon as the upcoming week. As noted above, political uncertainty is usually a negative input for Sterling, but the concerns about a no-confidence vote is something that markets have been contemplating for some time already. That means, unless a vote is actually confirmed we are not expecting much downside for Sterling. If a vote is confirmed, it is likely to weigh on the currency, but the focus after that will soon turn to whether the PM has enough support within his party to survive such a vote. If the markets think the PM has a high likelihood of succeeding, the vote could end up being a positive driver for Sterling instead of a negative one. Thus, we won’t be jumping into fresh GBP shorts if a vote is confirmed, we’ll be waiting for the outcome and would prefer some possible short-term upside trades on good news given how stretched positioning looks for Sterling right now.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic – Health – Geopolitics
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result further damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics remain a focus point as well given the ongoing war in Ukraine, but after the initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
3. CFTC Analysis
Another very bullish signal with all three major categories seeing another week of net-long weekly changes. It seems as if all three categories added longs at the worst possible time last week as the EUR failed to garner much upside momentum. With recent growth & inflation differentials turning in favour of the EUR we prefer trading the EUR higher on good news as opposed to chasing it lower on bad news right now.
4. The Week Ahead
The main event for the EUR in the week ahead will be the ECB policy decision. However, after the flurry of comments from various ECB members over the past few weeks, the meeting is not likely going to offer many surprises or fireworks, unless President Lagarde messes up her communication again. Markets are already pricing in 4 hikes (100bsp of tightening) by the end of the year, with a 25bsp hike in July and September fully priced. Thus, the focus will more likely shift to what happens after September, whether there is any specific mention that rates could rise above 0% by the end of the year. Furthermore, with inflation where it is, there has been some ECB members who have been hinting that a 50bsp might be up for discussion. This seems unlikely to be an option that the GC would want to go for at this stage but is a key risk we need to build into our scenario planning. Any comments from Lagarde that suggests a 50bsp could be possible in July would arguably be enough to give the EUR a bit of a lift. What the bank has to say about the recent move in Bund yields, and more specifically the climb in things like BTP/ Bund spreads, will be important as well. With inflation as big of a problem as it Is right now, they can’t afford to stop their hiking posture just to save spreads (even though they are important). Thus, being on the lookout for her comments on the spreads will be important, especially if the bank might be contemplating a new type of tool(s) to ease some of the issues with the widening spreads. The other driver to watch in the week ahead is the USD. As close to 60% of the DXY has a EUR weighting, any big fluctuations in the Dollar as a result of the US CPI print needs to be kept in mind for the EUR in general in the week ahead. Even though geopolitics have not really been a big EUR mover, we should keep geopolitics in the back of our min as a possible short-term catalyst for the EUR.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet . However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
2. Economic – Health – Geopolitics
With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces considerable stagflation risk, as price pressuresstay sticky while growth decelerates. Looking at growth forecasts, the pace of the expected slowdown in the UK compared to other major economies portrays a pretty bleak picture. That means current rate expectations continues to look too aggressive, even after the BoE’s recent dovish tilt. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. Political uncertainty is usually also a GBP negative, so the PM’s future remains a risk. If distrust grows the question remains whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). Reports over the weekend suggest that a no-confidence vote can happen as early as the upcoming week so that will be a focus point for GBP. The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside
3. CFTC Analysis
A fairly bullish signal for GBP as all three participant categories saw net-long weekly changes. Aggregate positioning is still below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from neutral, positioning looks stretched and means we are not too excited to chase the Pound lower from here.
4. The Week Ahead
With a very light economic data schedule for the week ahead, the more pressing matter for the GBP will probably fall to politics where reports over the weekend suggest that the PM could face a vote of no-confidence as soon as the upcoming week. As noted above, political uncertainty is usually a negative input for Sterling, but the concerns about a no-confidence vote is something that markets have been contemplating for some time already. That means, unless a vote is actually confirmed we are not expecting much downside for Sterling. If a vote is confirmed, it is likely to weigh on the currency, but the focus after that will soon turn to whether the PM has enough support within his party to survive such a vote. If the markets think the PM has a high likelihood of succeeding, the vote could end up being a positive driver for Sterling instead of a negative one. Thus, we won’t be jumping into fresh GBP shorts if a vote is confirmed, we’ll be waiting for the outcome and would prefer some possible short-term upside trades on good news given how stretched positioning looks for Sterling right now.
Penafian
Maklumat dan penerbitan adalah tidak dimaksudkan untuk menjadi, dan tidak membentuk, nasihat untuk kewangan, pelaburan, perdagangan dan jenis-jenis lain atau cadangan yang dibekalkan atau disahkan oleh TradingView. Baca dengan lebih lanjut di Terma Penggunaan.